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    ESRB Discusses Review of Macro-Prudential Framework for Banks

    March 31, 2022

    The European Systemic Risk Board (ESRB), at its March 2022 Board meeting, exchanged views on the future of the macro-prudential framework for banks, discussed priorities to make the framework fit for the next decade, and enhancements achievable in the short term. ESRB also published its quarterly risk dashboard, a note on the review of macro-prudential framework for the banking sector, a response to the European Commission consultation on the Mortgage Credit Directive or MCD.

    The General Board also agreed on the need for a quick adoption and implementation of the Markets in Crypto-Assets Regulation, which, among other objectives, aims to address financial stability risks that could arise from a wide use of crypto-assets and distributed ledger technology-based solutions in financial markets. At the meeting, the General Board notes that ESRB is set to publish, in the coming week its response to the European Commission call for advice on the review of the macro-prudential framework. The General Board also endorsed a Concept Note on the review of the macro-prudential framework for the banking sector, which highlights the ESRB priorities for the next decade. The note also highlights the need for more consistent, forward-looking, proactive, and countercyclical use of macro-prudential instruments, in addition to a need to reduce the complexity of the legal framework. ESRB outlines that the policy should:

    • be proactive, seeking to foster resilience before systemic risks materialize. ESRB highlights the need to ensure more releasable and effectively usable capital buffers and to supplement the macro-prudential toolkit with borrower-based measures. Borrower-based measures can help ensure sound lending standards and increase the resilience of borrowers, helping mitigate systemic risk at the European Union level. ESRB also stressed the need for appropriate legal arrangements so that decisions on the activation, calibration, and cancellation of borrower-based measures remain with national authorities.
    • be flexible, responding to structural changes in the financial system as well as cyber risks and risks relating to climate change. ESRB emphasized that the priority to enhance the toolkit to address cyber risks and climate‑related risks. ESRB stressed that cyber incidents could have a negative impact on financial stability; hence, the macro-prudential mandate needs to be extended to cover cyber resilience. Similarly, with regard to the climate-related risks, findings suggest that with some amendments, systemic risk buffers and limits on large exposures could be used to address systemic aspects.
    • form part of a holistic framework, fostering a consistent approach to regulation across all activities in the financial system and facilitating cooperation between authorities at all levels. ESRB highlights that closer cooperation could help national and European Union authorities to embed their specific policy responses in a system-wide context and all relevant authorities should have access to the granular data needed to assess the systemic implications of system-wide stress.

    ESRB also published a response letter to the European Commission consultation on the review of the Mortgage Credit Directive. ESRB emphasizes the need to include borrower-based measures in the European Union legislation and considers that there should also be a common minimum basis for borrower-based measures in national legal frameworks. This proposal is further elaborated in the ESRB’s Concept Note, in which ESRB takes a more comprehensive view and proposes enhancements to the existing EU macro-prudential framework. ESRB states that a minimum set of borrower-based measures should be included in the Capital Requirements Directive (CRD) and the scope should be extended to all types of lenders. The inclusion will allow authorities to apply macro-prudential borrower-based measures to loans granted by all types of lenders, including insurance companies, investment funds, and pension funds. Such an approach would not only minimize regulatory arbitrage but also eliminate the possibility of circumventing restrictions that apply to residential real estate funding due to the imposition of borrower-based measures on banks as lenders.


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    Keywords: Europe, EU, Belgium, Systemic Risk, Disclosures, Mortgage Credit Directive, Residential Real Estate, CRD, Macro-Prudential Policy, Borrower-Based Measures, Lending, RRE, MCD, Basel, Regulatory Capital, ESRB, EC

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